As the polls expected, the Spanish election offered no surprises as the Center Right Popular Party appears to have attained an outright majority and the socialist party has been trounced. The markets appear to want to believe that this outcome is EURO POSITIVE AND SPANISH AND ITALIAN DEBT POSITIVE BUT I WARN THAT IT AIN’T NECESSARILY SO. Did the PP win a historic election so that they can deliver MORE AUSTERITY TO THE SPANISH PEOPLE? HOW MUCH ECONOMIC CONCESSIONS ARE THE SPANISH PEOPLE WILLING TO MAKE? IF THE ANSWER IS VERY LITTLE, THEN WHAT NEXT FOR THE EUROPEAN UNION?
The outcome of the elections actually create more uncertainty than resolve any of the pressing issues and most importantly the new government will not be seated until mid-December. It is interesting that the BTP/BUND futures spread rallied both Thursday and Friday and yet the EURO did not gain much ground on the DOLLAR or the EURO CROSSES.
Some pundits were advising the buying of the BTP futures to take advantage of the high Italian yields. The idea of buying Spanish and Italian debt may be appealing and may work if the ECB is providing the short-term boost. I would not advise adding the stressed DEBT of the PIIGS to any long-term portfolios. Europe has to make some very difficult decisions about what it really wants to be and anyone who tries to catch a falling piano will be tested. Bruce Springsteen said it best:
“Highways jammed with broken heroes on a last chance power drive
Everybody’s out on the run tonight but there’s no place left to hide.”
***The S&Ps have opened lower tonight as it appears that the SUPERCOMMITTEE
will fail to meet any type of real results on meeting the deficit reduction targets
. It seems that the automatic cuts will be enacted as the 2012 elections are preventing genuine decision-making for fear of the political fallout. It is probably an even money bet that all the members of the COMMITTEE
are short of equities as it seems perfectly okay that Congress can benefit from its own incompetence.
It is not certain that the SUPERCOMMITTEE is dead but that has been what the leaks that have made it into the news. Maybe if the S&Ps and DOW were to get trashed on Monday, the Washington elite would regain their focus and actually take the reins of leadership and stop worrying about reelection. A pox on both parties and their narrow-minded self-interests.
***It seems that Chancellor Merkel and Mario Draghi are the focal point of Europe for the ECB
will not move to further backstop European banks until the Germans are willing to be more supportive of the ECB
as the lender of last resort. German leaders want more guarantees on austerity budgets before they acquiesce to greater ECB
involvement. Again, the issue is about the banks rather than the sovereigns. If there is renewed stress on sovereign debt, many European banks are going to be insolvent, especially the French banks as they are loaded with Italian and Spanish DEBT
The German banks are also holding a great deal of sovereign debt but appear to be more insulated then the French for the moment. Just last month DEXIA collapsed and had to be absorbed by the Belgium and French states after having been given a recent clean bill of health. Things can change swiftly in a BALANCE SHEET RECESSION WORLD and all investors need to be alert, especially as we enter the HOLIDAY MARKETS.
Tags: BTP/bund futures, Debt, Dexia, Dollar, Draghi, ECB, Euro, Italian bonds, Merkel, PIIGS, Spanish bonds, Spanish elections, Supercommittee, Washington